Jalbert v. Zurich Services Corp., 032020 FED1, 18-2244

Docket Nº:18-2244
Opinion Judge:TORRUELLA, Circuit Judge.
Party Name:CRAIG R. JALBERT, in his capacity as Trustee of the F2 Liquidating Trust, Plaintiff, Appellant, v. ZURICH SERVICES CORPORATION, d/b/a Zurich American Insurance Co.; and X.L. GLOBAL SERVICES, INC., d/b/aXL Catlin Specialty Insurance Co., Defendants, Appellees.
Attorney:Andrew B. Ryan, with whom Robert J. Giglio, Jr., Ryan Law Partners LLP, William Baldiga, and Brown Rudnick LLP were on brief, for appellant. Andrew L. Margulis, with whom Ropers, Majeski, Kohn & Bentley, P.C. was on brief, for appellee Zurich American Insurance Co. Cara Tseng Duffield, with whom ...
Judge Panel:Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges.
Case Date:March 20, 2020
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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CRAIG R. JALBERT, in his capacity as Trustee of the F2 Liquidating Trust, Plaintiff, Appellant,

v.

ZURICH SERVICES CORPORATION, d/b/a Zurich American Insurance Co.; and X.L. GLOBAL SERVICES, INC., d/b/aXL Catlin Specialty Insurance Co., Defendants, Appellees.

No. 18-2244

United States Court of Appeals, First Circuit

March 20, 2020

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Rya W. Zobel, U.S. District Judge]

Andrew B. Ryan, with whom Robert J. Giglio, Jr., Ryan Law Partners LLP, William Baldiga, and Brown Rudnick LLP were on brief, for appellant.

Andrew L. Margulis, with whom Ropers, Majeski, Kohn & Bentley, P.C. was on brief, for appellee Zurich American Insurance Co. Cara Tseng Duffield, with whom Wiley Rein LLP was on brief, for appellee XL Specialty Insurance Co.

Before Howard, Chief Judge, Torruella, and Thompson, Circuit Judges.

TORRUELLA, Circuit Judge.

This case involves an insurance coverage dispute between plaintiff-appellant Craig R. Jalbert ("Jalbert"), in his capacity as trustee of the F2 Liquidating Trust -- a trust established during the bankruptcy proceedings of former investment advisory firm F-Squared Investments, Inc. ("F-Squared")1 -- and two of F-Squared's excess insurers.

Jalbert filed suit against Zurich American Insurance Co. ("Zurich") and XL Specialty Insurance Co. ("XL") (collectively, the "Excess Insurers") to recover unreimbursed defense costs that F-Squared incurred in connection with a Securities and Exchange Commission ("SEC") investigation of F-Squared. Jalbert claimed that the Excess Insurers' refusal to cover those costs constituted a breach of their insurance contracts. The Excess Insurers argued that F-Squared is not entitled to coverage because the underlying claim at issue here should be deemed to have been "first made" before their respective policies took effect on October 3, 2013. Jalbert, on the other hand, asserted that enforcement proceedings against F-Squared were not a reasonable possibility until after the Excess Insurers' policy period began to run and thus, that the underlying claim was first made within the policy period.

The Excess Insurers filed motions for summary judgment, which Jalbert opposed. In granting summary judgment for the Excess Insurers, the district court held that an SEC order issued on September 23, 2013 -- before the start of the Excess Insurers' coverage period -- initiated an investigation of F-Squared based on information tending to show that F-Squared had violated federal securities laws. The court ruled that this order triggered the policy's "deemed-made" clause, which meant that the claim was deemed "first made" at that time, prior to the Excess Insurers' policy taking effect. Jalbert now appeals the grant of summary judgment to the Excess Insurers. After careful review, we affirm, finding that the SEC investigation is a claim that is deemed to have been first made when the SEC order issued on September 23, 2013, prior to the inception of the Excess Insurers' policies and thus outside of their coverage period.

I. Background

A. Factual Background

1. The SEC Investigation

On September 23, 2013, the SEC began a private investigation of F-Squared by issuing an "Order Directing Private Investigation and Designating Officers to Take Testimony" in a non-public document captioned "In the Matter of F-Squared Investments, Inc., (B-2855)" (the "Formal Order"). The Formal Order indicated that the SEC had information that tended to show that, from at least January 1, 2009, F-Squared and some of its affiliated entities and individuals had distributed false and misleading advertisements to clients or prospective clients in possible violation of the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. It ordered "that a private investigation be made to determine whether any persons or entities ha[d] engaged in, or [were] about to engage in, any of the reported acts or practices or any acts or practices of similar purport or object." The Formal Order also empowered certain SEC officers to issue subpoenas, take evidence, and require the production of relevant documents. On September 30, 2013, the SEC issued a "Supplemental Order Designating Additional Officers" to the investigation. The order shared the same caption as the Formal Order.

On October 2, 2013, the SEC's Division of Enforcement served a subpoena on F-Squared in connection with F-Squared's "formal investigation." The subpoena requested documents pertaining to, among other things, F-Squared's advertisements, marketing materials, presentations, documents, due diligence and performance records, and communications concerning one of its investment strategies. The subpoena bore the same caption as the Formal Order and expressly referenced the Formal Order as authorizing its issuance. On October 7, 2013, the SEC served deposition subpoenas on F-Squared's CEO, Howard Present, and its Managing Director, Richard Tomney. Both subpoenas bore the same caption as the Formal Order and the October 2, 2013 subpoena.

On October 17, 2013, F-Squared requested a copy of the Formal Order from the SEC, which the SEC provided the next day, along with a copy of the supplemental order designating additional officers. F-Squared amassed millions of dollars in defense costs as a result of the investigation.

2. The Insurance Policies

a. The 2012-2013 Policies

F-Squared had a primary $5 million insurance policy from Columbia Casualty Company ("Columbia") for the period of October 3, 2012 to October 3, 2013. F-Squared also obtained an excess policy from Federal Insurance Company ("Federal") for an additional $5 million in excess coverage (after the Columbia policy exhausted its $5 million limit) for the same period. The Federal policy is a "follow-form" policy to Columbia's, meaning that coverage is subject to the terms and conditions of the primary policy (here, Columbia), unless otherwise specified.2

The Columbia policy (and therefore the Federal policy) covers only "any claim first made against [F-Squared] during the policy period." The policy defines "Claim" to include: a formal regulatory proceeding (civil, criminal or administrative) against or formal investigation of an Insured, including when such Insured is identified in a written Wells3or other notice from the SEC or a similar state or foreign government authority that describes actual or alleged violations of securities or other laws by such Insured . . . for a Wrongful Act . . . .

A "Wrongful Act," in turn, is defined as "any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty."

The key policy provision for this appeal is the "Deemed-Made Clause," which provides guidance to determine when certain claims are deemed "first made" and therefore, whether they are covered by the policy. With respect to a formal investigation, the clause provides that "[a] Claim shall be deemed first made" upon "an Insured being identified by name in an order of investigation, subpoena, Wells Notice or target letter . . . as someone against whom a civil, criminal, administrative or regulatory proceeding may be brought."

b. The 2013-2014 Policies

F-Squared renewed both the Columbia and Federal policies for the policy period running from October 3, 2013 to October 3, 2014. For this same period, F-Squared also sought additional excess coverage from the Excess Insurers. Zurich issued a $5 million second excess policy and XL issued a $5 million third excess policy for F-Squared.4 Thus, for the 2013-2014 policy period, F-Squared had a total of $20 million in liability insurance coverage. The Excess Insurers' policies followed the terms, conditions, and limitations of the 2013-2014 Columbia policy and the other underlying policies (which also followed the Columbia policy). All four 2013-2014 policies, thus, applied "only to any claim first made against [F-Squared]" between October 3, 2013 and October 3, 2014. The relevant provisions of the 2013-2014 Columbia policy remained substantively unchanged from those in the 2012-2013 Columbia policy, which we have already described.

3. F-Squared Seeks Coverage

On November 7, 2013, F-Squared emailed Columbia a "notice of claim" letter informing it of the October 2 and October 7 subpoenas in connection with "a formal investigation by the [SEC]," for which it had retained counsel. F-Squared attached the subpoenas (but not the Formal Order) and requested coverage under the 2012-2013 policy "or its renewal which ha[d] not yet been received," as well as "confirmation of coverage under all applicable policies issued by [Columbia]."[5] It also forwarded the letter to Federal, Zurich, and XL. On December 10, 2013, Columbia agreed to provide coverage under the 2012-2013 policy for the defense costs incurred, and ultimately paid up to the $5 million limit of liability. Federal also paid its $5 million limit of liability under its 2012-2013 policy. The Excess Insurers, however, denied coverage to F-Squared on the basis that the SEC investigation constituted a claim first made prior to the 2013-2014 policy period and thus outside the policies' coverage.

B. Procedural History

On November 10, 2017, after F-Squared filed for bankruptcy, Jalbert sued the Excess Insurers in the United States District Court for the District of Massachusetts for breach of contract. Jalbert alleged that the Excess Insurers breached their contractual duty under their respective insurance policies to reimburse F-Squared for defense costs incurred in connection with its response to the SEC investigation. On February 28, 2018, the Excess Insurers each filed motions for...

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